Construction industry remains optimistic despite Q3 slowdown

Growth in the construction industry accelerated to its fastest rate in 2014. While we are unlikely to see growth rates near such levels in the coming years, prospects for the industry still appear bright. Construction output is forecast to grow 3.6% in 2015 and 3.8% in 2016 – and overall 19.7% by 2019, according to our latest Autumn Forecast.

This latest forecast has been revised down from our Summer edition, which estimated growth of 4.9% in 2015 and 4.2% in 2016, primarily reflecting widespread weakness across the industry during the third quarter of 2015. Output in the construction industry fell 0.1% on a yearly basis in Q3, which is the first annual decline since 2013 Q1. So, what has triggered this slowdown in the short-term?

This can largely be explained by the massive skills gap left in the construction industry following the onset of the financial crisis. With the development pipeline strong across the industry, a rising demand for skilled workers continues to outpace supply, which, in turn, has increased competition for existing capacity. Inevitably, the consequence of such market dynamics will push salaries up; according to the ONS, average weekly earnings in construction, overall, grew 6.8% year-on-year in July to reach £605, the highest on record. And within occupations used in house building, where there has been rapid growth in the last couple of years, earnings are likely to have risen even more. Thus, with increasing labour costs adding to overall construction costs, there is no doubt that developers are feeling the pressure – particularly within private housing and commercial.

In Q3, major house builders continued to report difficulties in recruiting on-site trades, especially bricklayers, carpenters and plasterers. Alongside this, three-quarters of large contractors reported higher labour costs over the quarter, according to the CPA’s Construction Trade Survey. In the commercial sector, projects are reported to have been delayed as contractors return to clients and renegotiate prices, because costs have risen considerably since contracts were won 12-18 months ago.

Despite the challenging environment, the construction industry is expected to remain strong over the next five years. Here is what we expect to see across key sectors:

Private housing – growth of 10.0% forecast in 2015, followed by 5.0% in 2016 and 22.6% between 2015 and 2019.

Commercial – expected to fall 0.1% in 2015 as positive output growth in offices, education and health is weighed down by the weakness in retail and entertainment. A return to growth is anticipated from 2016 mainly driven by offices and 16.3% growth by 2019.

Infrastructure – output is forecast to average growth of 11.2% per year between 2015 and 2019 primarily driven by the roads and energy sub-sectors. The latter is expected to enjoy double-digit growth each year over the next five years and in 2019 infrastructure output is expected to be 50.0% higher than in 2015.